Why Simple Interest Fixed-Rate Annuities (MYGAs) With Higher Rates Can Outperform Compound Interest MYGAs When You Plan to Withdraw Interest

When comparing multi-year guaranteed annuities (MYGAs), most customers assume that compound interest always produces the best return. Compounding is widely known as one of the strongest forces in finance, and in most cases, especially with long-term savings, this is true.

However, there is one major exception, and it can dramatically change the amount of income you receive from your annuity:

If you plan to withdraw the interest your MYGA earns, monthly or annually, a simple-interest MYGA with a higher fixed rate can actually produce more income than a compound-interest MYGA with a lower rate.

This expanded guide explains why, breaks down how each type of MYGA works, includes examples, and helps you choose the right MYGA structure for your retirement or income strategy.

Are Simple-Interest MYGAs With Higher Rates Better Than Compound-Interest MYGAs When Withdrawing Interest?

Yes.

If your strategy is to withdraw interest regularly, simple-interest MYGAs with higher fixed rates usually produce more income.

Once you remove interest from the contract:

• There’s no balance for interest to compound on
• The future value of compound interest becomes irrelevant
• The only thing that matters is the stated rate applied to your principal

This is why a 5.80% simple-interest MYGA can outperform a 5.10% compound-interest MYGA for income purposes, even though “compound” sounds more powerful.

Quick Comparison Table

What Is a Simple-Interest MYGA?

A simple-interest MYGA credits interest only on the principal amount, not on previously earned interest. Because there is no compounding, insurers often offer higher fixed rates to make the product more attractive.

Ideal for retirees who want:

• Predictable income
• Monthly or annual interest withdrawals
• Maximum cash flow from safe annuity products
• A fixed, guaranteed return without needing compounding

Simple-interest MYGAs are especially popular among individuals who treat annuities as income tools rather than long-term growth vehicles.

What Makes Compound-Interest MYGAs Different?

A compound-interest MYGA credits interest on:

• The original principal
• Plus all previously earned, unwithdrawn interest

This allows your money to grow faster, but only if you keep the interest inside the contract.

Best for buyers who:

• Want maximum accumulation
• Do not plan to withdraw interest
• Want a larger lump sum at maturity
• Are using the MYGA as a growth asset rather than an income generator

Compound interest is better in long-term, untouched-growth scenarios. But the moment you start withdrawing interest, this advantage disappears.

Why Intent Matters: The Critical Concept Most Buyers Miss

When you withdraw interest:

• The compounding engine shuts off
• You don’t earn “interest on interest”
• Returns revert back to simple interest anyway
• The MYGA with the higher rate wins—every time

This means:

• If the simple-interest version has the higher guaranteed rate, it produces more yearly income.
• If you don’t allow interest to accumulate, compounding becomes irrelevant.

It’s one of the most misunderstood concepts in retirement income planning.

Example: The Higher Simple-Interest Rate Wins (Even vs. Compound)

Assume:

• You invest $100,000
• You withdraw interest every year

Option A: Simple-Interest MYGA — 5.80%

• Annual interest: $5,800
• Total income: $5,800
• Compounded equivalent: 5.22% (if you left interest in and did not withdraw any interest)

Option B: Compound-Interest MYGA — 5.40%

• Annual interest when withdrawn: $5,400
• Compounding: irrelevant (because you’re not retaining interest)

Result

The simple-interest MYGA produces $2,000 more over 5 years ($400 per year) in spendable income.

Over 5 years:

• Simple interest total income: $29,000
• Compound interest total income: $27,000

Difference: $2,000 more income, purely because of the higher simple-interest rate.

Why Insurers Often Offer Higher Simple-Interest Rates

Insurance companies can safely offer higher simple-interest crediting rates because:

• They don’t have to compound interest internally
• Their liability is easier to forecast
• Buyers often overlook the simple-interest option
• Most competition focuses on compound rates

This creates a unique opportunity for retirees who want predictable income.

When a Simple-Interest MYGA Is the Better Choice

Choose a simple-interest MYGA if you:

• Want maximum monthly or annual income
• Prefer consistent, predictable cash flow
• Are using the annuity for retirement income
• Plan to spend the interest rather than reinvest it
• Care more about income than long-term growth

If your primary goal is income, the higher rate on simple-interest MYGAs nearly always produces a better real-world result.

When Simple Interest Rates Outperform Even on a Growth/Accumulation Basis

There are times when the simple interest has a compounded rate equivalent that may be higher than another product’s compound rate, if NO interest is withdrawn. For instance:

Different Scenario:

• Product’s Simple Interest Rate: 6.25%
  • Equivalent "as-if" compounded rate if no interest is withdrawn: 5.59%
• Compare to Another Product’s Compound Rate: 5.40%

Thus, even on a compounded, no interest-withdrawn basis, the equivalent compounded rate is higher at 5.59% compared to 5.40%.

When a Compound-Interest MYGA Is Better

Choose a compound-interest MYGA if you:

• Want to maximize long-term accumulation
• Plan to let the interest grow untouched
• Are preparing for a future lump-sum event (RMDs, home purchase, legacy planning)
• Want the full power of compounding over 3–10 years

Compound MYGAs often produce significantly larger maturity values—as long as you don’t withdraw interest along the way.

Tax Considerations

The IRS treats MYGA interest similarly to CD interest.

• Non-qualified annuities
  • Interest withdrawn is taxed as ordinary income.
• Qualified annuities (IRA, 401k)
  • Everything withdrawn is taxable, not just interest, because contributions were pre-tax

If you withdraw interest:

• It is taxed in the year you receive it

If you don’t withdraw interest:

• Tax is deferred until the end of the MYGA term—or until you withdraw it

This tax-deferral is one of the biggest advantages MYGAs have over bank CDs.

How MYGAs Compare to CDs When Using Interest Withdrawals

Many retirees compare MYGA income withdrawals to CD interest payments. Here are key differences:

For income-focused retirees, MYGAs often provide:

• Higher payouts
• More flexibility
• Better tax treatment

Frequently Asked Questions 

1. Do simple-interest MYGAs always pay more income?

Not always—but usually, because insurers set the simple-interest rate higher.

2. What happens if I start withdrawing interest from a compound MYGA?

It effectively becomes simple interest. The compounding benefit disappears.

3. Are interest withdrawals guaranteed?

Most MYGAs allow free interest withdrawals, but it depends on the contract.

4. Are MYGA interest payments taxed?

Yes, when withdrawn. If you leave interest in the contract, taxes are deferred.

5. Which type is safer?

Both simple and compound MYGAs are equally safe; the only difference is the crediting method.

In Summary

Compound interest is powerful, but only when it’s allowed to work.

If your retirement plan includes:

• Withdrawing interest
• Creating predictable income
• Maximizing cash flow

…then a simple-interest MYGA with a higher fixed rate will usually provide:

• Higher monthly/annual income
• More predictable payments
• A better income-focused return
• More value in real-world usage

This is why more retirees and advisors are choosing simple-interest MYGAs when building guaranteed income ladders and fixed-income strategies.